Commodity money, natural values, and central banking in Ricardo

Abstract

Ricardo studied the effects of alternative institutions on natural relations and ranked alternative monetary systems according to their ability to equalise the value of money to the natural value of gold. Pure commodity money is at the top of his normative hierarchy, only surpassed by his own "perfect" system. In commodity money systems, the price level is equal to the relative price of gold for "commodities in general", and money is endogenous. The quantity theory, by contrast, comes in operation in monetary system where the gold anchor is lost or works imperfectly. The supposed contradictions of Ricardo's monetary theory disappear within the interpretative framework adopted here. This framework builds on Pasinetti's insights in the role of natural values in Classical economics; develops Ricardo's own type-of-economy approach to monetary analysis; and shows that, far from being a commodity like any other, commodity money is a specific, complex institutional system.